Are The EU And IMF Bullying Ireland?

By many measures, Ireland’s EU-IMF program has been a success. The country has hit its targets so far and has been able to borrow money at decent rates from the sovereign bond market. It has sufficient funds on hand to allow it to exit from the program at the end of this year. Given all that, you might be surprised to find out there’s a fairly nasty political argument going on between Ireland’s Deputy Prime Minister, Eamon Gilmore, on the one hand, and the EU and IMF on the other.

The argument centers on how much fiscal adjustment Ireland needs to implement in its upcoming October budget. The EU and IMF would like Ireland to implement €3.1 billion (about two percent of GDP) in spending cuts and tax increases, with officials such as European Stabilisation Mechanism (ESM) chief Klaus Regling warning that this amount was “foreseen under current rules and as previously agreed”.

In contrast, Mister Gilmore argues that what has been agreed is to bring the budget deficit to 5.1 percent of GDP in 2014. Thanks to Ireland’s uber-complicated promissory note deal (full complicated details here) the amount of adjustment required to achieve the 5.1 percent target is now about €1 billion less than had previously been envisaged. Mister Gilmore argues that the IMF and EU are treating Ireland like “some type of economic experiment for austerity hawks” by insisting on the full €3.1 billion in cuts and tax hikes. Effectively, he believes Ireland is being bullied by the Troika.

So who’s right here? On the question of whether Ireland had agreed to deliver €3.1 billion in adjustment in this budget, I score this one for Mister Gilmore. Ireland’s program has been governed by Memoranda of Understanding (MoU) that have been revised each quarter. The first MoU is here: For the first few budgets it specified fixed amounts of euros of fiscal adjustment that had to be undertaken. However, page 31 shows that the only agreement for the upcoming budget was that the deficit hit the required target, not that a certain amount of adjustment be undertaken.

Various subsequent program documents (such as here on page 5 in November 2012) mention €3.1 billion as the likely amount of adjustment required in this budget. But by the March 2013 document, this figure appears to have disappeared.

Still, despite the absence of any written-in-stone commitment to apply €3.1 billion in adjustment, there are a number of reasons why the Irish government remains under pressure to do so. One involves the ever-influential ECB. The ECB will only allow Ireland’s promissory note arrangement to remain in place provided it is not interpreted as “monetary financing” of the government. The explicit linking of the arrangement with an easing of budgetary adjustment is likely to be irritating the hell out of some of the hard-liners in the Eurotower.

Even more important is the role played by Mister Regling’s ESM. Ireland appears to be in background discussions with the ESM to obtain a “precautionary credit line” in case it loses access to sovereign debt markets again. Despite signs that Ireland is performing better than other program countries, the GDP figures for the first quarter showed the economy contracting and there are concerns that the debt-GDP ratio is going to continue increasing beyond 120 percent.

With the fiscal situation so dire, Mister Regling and Europe’s finance ministers may be reluctant to sign off on any deal without seeing a commitment to stick to the essentially-symbolic €3.1 billion adjustment. And given the desirability of a precautionary credit line from ESM, the Irish government may not have a strong hand to play against the Europeans on this issue.

The stakes are high here for Mister Gilmore. There does not appear to be a corresponding sense of unease with the €3.1 billion adjustment in his centre-right partner party in government, Fine Gael. It is Gilmore's left-leaning Labour party that have so far borne the brunt of public dissatisfaction with spending cuts and tax increases and they are looking at large losses in the next election, due to take place in early 2016 at the latest.

Having set his stall out on this issue, the question of a €3.1 billion budget adjustment may end up being a line in the sand for Gilmore and a threat to the stability of the government. The fact that he was right about what actions Ireland had agreed to take may be cold comfort for him if he ends up forcing an early election on this issue.

I’m a Professor of Economics at University College, Dublin. I have a PhD in economics from MIT. I worked for the Federal Reserve Board from 1996 to 2002, regularly briefing Alan Greenspan and working on the FOMC's macroeconomic forecast. From 2002 to 2007, I worked for the C...